Tomorrow (Friday) is going to be an interesting day. And there are a couple of ways to look at it.
This is a market specific event and a company specific event.
You can say whatever you choose about interest rates, but the market was priced for perfection. It had to be with the leaders in the NAZ going parabolic.
Lucent's earnings warning made it a company specific event - for all companies. When the most widely held stock in the US tanks 30%, investors realize that maybe attributing a billion dollar market cap to a newly-minted e-commerce company with less than $5M in revenue and no profits, might be a concept that's just a little ahead of its time.
So, what do you do?
Do nothing if you've held the stock less than a year and don't qualify for long term capital gains treatment unless you absolutely want to just get out of the market and never look back. If you sold the stock to get out of your position, you'd pay 35-45% of your net gains in federal and state income taxes. And, you'd be off the roller coaster and out of CMGI.
Gonna try and time re-entry? Then re-read scarecrow's post about the world being full of binomial distribution curves that prove you can't time the market..
But even if you're just net long the stock, the taxes you would otherwise pay the IRS effectively hedges you up to your combined federal and state incremental tax rates. You pay taxes at a 40% combined federal and state rate? Well, you don't really lose 100% on any decline between two price points. You only lose 60%. The IRS loses the other 40%.
Selling calls using market orders tomorrow is going to be dicey and you're likely to get poor executions - you thought you were selling an option for 25 and it got filled at market, at 12. So you call your brokerage house and if you get through, they tell you that because of "fast market conditions", they did the best they could. Want to sue them? Well, take a number and stand in line....
But now, by selling the calls (and, there's some pretty hefty premiums further out), you've capped your upside on CMGI out to the expiration month. And, when the stock turns around, you're likely to buy them back at much higher prices. Trust me. I've taken this ride before.
Buying puts tomorrow using market orders is gonna cost you more than anything you paid for, ever. The put volatility will likely explode upward so you put in a market order to buy a put while they're being offered at 15 and you get filled at 40. When CMGI bottoms out, the put volatility will collapse, the stock, over time, will return to higher levels, and the puts you paid 40 for will be worth 15. It ain't fair, but that's how it works.
When the stock was on the move the last 40 days, I kept putting a floor under it, by buying puts, the Jan, Feb, and March 150's, 160's, 185's, and 220's. Yeah, it costs money for insurance, but the idea is to have it there before you need it. Back then, they were practically giving away puts because nobody wanted them and they priced them accordingly, at lower volatilities. Also sold calls on everything I owned in CMGI, from the Jan and Feb 260's to the 320's. It basically paid for the puts and I figured that if the stock was over the option strike at the expiration date, I'd just let the stock be called and pay the long-term capital gain tax, or, buy the options back.
But that's what you do when you invest. You hedge your bets so you can invest tomorrow. And you follow two rules:
1. Never lose money
2. Never break the first rule.
So let's let this be a lesson of sorts, for all of us to think counter-intuitively. The opposite of the "fight or flight" reaction. When you get greedy, you have to either sell out your position or hedge (the opposite of what most individuals do). And when you get fearful, you buy in or add to your position (again, the counter-intuitive approach).
I don't look forward to the next few weeks on the boards because I'll have to explain to four letter versed shorts why CMGI is still a great stock and that because of the gains I made on my puts, I just had to own more of the stock. And they'll think "what, are you nuts?"
Ahhh, man......
Just a word of advice to everyone. IMO, if tomorrow is a real flush-out in the NAZ, like down 200, it may all be over in a day. If the NAZ is only down only 60 or 70, Monday could be a mess.
But I'm in CMGI for the long-term. Like many of you.
And I don't break my rules...
Good luck to everyone,
Mark |
